The Internal Revenue Service opened 1,100 criminal investigations of tax fraud by June 30 of this year, exceeding the 2012 total with three months remaining in the fiscal year.

The agency has doubled the number of employees working on tax-fraud cases to more than 3,000 and is approaching last year’s total of 5 million suspicious tax returns rejected, interim IRS leader Danny Werfel told a congressional committee today in Washington.

Those efforts would be complicated by additional budget cuts proposed in Congress, Werfel said. A budget cut of about $1 billion since 2010 has led the agency to cut about 8 percent of its full-time staff, or about 8,000 workers, he said.

With further cuts, “we would no longer be able to sustain our current level of effort on identify theft without significantly weakening other programs,” Werfel said.

House Republicans have proposed reducing the agency’s budget by 24 percent.

Werfel’s testimony to a subcommittee of the House Oversight and Government Reform panel comes as the agency is mired in controversies over its scrutiny of Tea Party groups, spending on conferences and payment of bonuses to agency officials.

President Barack Obama forced out Werfel’s predecessor, acting IRS commissioner Steven Miller, and yesterday nominated John Koskinen to take over the agency.

“Refund fraud caused by identity theft is one of the biggest challenges facing the IRS today,” Werfel told the House subcommittee.

Death Records
Criminals with access to taxpayers’ identifying information—sometimes from death records or employer payroll files—can create fraudulent tax returns and obtain refunds before the actual taxpayer is aware of the theft.

Obama’s 2014 budget plan included proposals to curb a rise in identity theft occurring through tax returns. It called for a $5,000 civil penalty for tax-related identity theft, restricting access to Social Security death records and allowing employers to avoid putting Social Security numbers on W-2 wage reporting forms.

For fiscal year 2012, the IRS’s identity-theft unit received about 450,000 cases, up 78 percent over the previous year, according to the National Taxpayer Advocate, an independent organization within the agency. This year, the IRS has resolved 565,000 cases, Werfel said.